‘Earnings recession’ ending

Market seen supported as growth returning to normalcy

2015 Year-end Target: 1,800 points KLCI: 1,699.92 points

FBM KLCI ‘earnings recession’ since 2013 is likely to end soon… The earnings growth path of Malaysia’s 30 largest listed corporations has been rather dismal during the past several years despite the continued macroeconomic expansions. The odd disconnect can be attributable, among others, to the higher aggregate weightage of commodity-related constituents, particularly from oil palm and oil & gas sectors, in the FBM KLCI vis-à-vis their weighted contributions to the overall economic output. On this score, it must be highlighted that, pursuant to the post-2008 recovery, world’s commodity prices in general (based on UBS Bloomberg CMCI Composite) reached their cyclical peak in 2011 period and the subsequent pullbacks saw further intensification last year. Nevertheless, the ‘earnings recession’ which began in 2013 is likely to end soon as commodity prices are believed to be bottoming out. Furthermore, domestic demand is expected to remain robust coupled with improving external conditions particularly among the industrialized economies.

Equity ‘earnings recession’ amidst continued macroeconomic expansions

…with consensus 2016 earnings growth returning to near double-digit… Accordingly, the consensus 2016 FBM KLCI earnings growth is expected to return to a healthy, and more normal, near double-digit level of 9.01%. The anticipated forward year performance is in stark contrast to the current year earnings growth estimate of -1.26% as well 2014 and 2013 growth figures of merely 1.99% and -5.05% respectively. As a rule of thumb, basing of empirical performance, the equity benchmark would normally register earnings growth that outperform or at least matches the percentage rise in nominal GDP.

FBM KLCI historical and forward consensus earnings growth

…as reflected by the earnings forecasts of its constituents. The source of FBM KLCI forward year earnings growth can be inspected from the consensus earnings forecasts of its 30 constituents. Among the expected top earnings growth performers in 2016 are SapuraKencana, IHH Healthcare and CIMB Group.

Consensus earnings forecasts (calenderized) of FBM KLCI constituents

Similarly, expect FBM KLCI to also escape the ongoing ‘price recession’… It is notable that FBM KLCI trajectory since 2013 mimicked the underlying earnings performance. Hence the anticipated earnings growth recovery in 2016 may also see the benchmark similarly escaping the ongoing ‘price recession’. FBM KLCI ‘price recession’ since 2013 mimicked the underlying earnings performance

…albeit tepidly as forward valuation may be dragged by tightening liquidity. However, going forward, we expect ever tightening liquidity conditions pursuant to the unwinding of QE3 in last year and coupled with the prospect of US interest rate hikes beginning later this year. Thus, the pace of FBM KLCI price recovery may be restrained by the gradual moderation of its PER multiple.